Legislature(1995 - 1996)
01/24/1996 01:07 PM House TRA
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HB 362 - AVIATION FUEL TAX EXEMPTION Number 1400 REPRESENTATIVE GENE THERRIAULT read his sponsor statement into the record, "HB 362 extends the motor fuel tax exemption for fuel used in aircraft for flights that continue from a foreign country. Currently, the state of Alaska provides a tax exemption for fuel used only in flights to foreign countries. Federal law preempts state taxation of imported aviation fuel transported through a foreign trade zone (FTZ) for use in aircraft during foreign flights. The federal definition of `foreign flight' includes flights originating from and flights continuing to a foreign country. Two tankers filled with tax exempt foreign-produced fuel were brought into Alaska during 1995. It is anticipated this practice will increase as airlines move to purchase the tax exempt fuel for use in foreign flights at a lower cost than taxable Alaska produced fuel. HB 362 is needed to provide a level playing field to Alaska producers by allowing the exemption for all fuel used in foreign flights." Number 1472 REPRESENTATIVE THERRIAULT informed the committee that in their packets of letters from the Fairbanks Chamber of Commerce and a resolution from the Fairbanks Daily News-Miner for the support of HB 362. He said the letters from Federal Express, and Northwest Airlines indicate that they will use imported fuel if it is provided at a lower cost. The Department of Revenue (DOR) report states the state taxation of imported aviation fuel obtained from a FTZ in Alaska for use in foreign commerce is preempted by federal law. Number 1534 REPRESENTATIVE THERRIAULT referred to the fiscal note prepared by the DOR and pointed to the estimated amount the DOR feels it would lose because of HB 362. DOR specified only half of aviation fuel tax would be lost because the other half is already under the FTZ exemption. This amount was listed as $700,000. Representative Therriault said that the tankers that brought fuel into the state at the end of the year and brought half of that amount the DOR estimates. therefore the amount the state would lose to revenue would be much higher. He continued that if foreign fuel can be sold under the tax exemption, more companies will chose to do so and thus more revenue will be lost. REPRESENTATIVE THERRIAULT asked that if the committee moves HB 362 an effective date at the end of this fiscal year be added. Number 1708 REPRESENTATIVE JAMES asked if calculations had been preformed as to the extended cost to the state, such as cost to the railroad, corporate income tax, et cetera, if HB 362 was not passed. Number 1729 REPRESENTATIVE THERRIAULT said calculations involve some guess work and he didn't have anything written down, but he could certainly see the loss to other areas if foreign fuel was purchased. Number 1764 REPRESENTATIVE BRICE asked the amount of the collected revenue from imported fuel and was told that it was under federal jurisdiction and it was outside the scope of the state to tax it. Number 1813 WILSON L. CONDON, Commissioner, Department of Revenue was next to testify on HB 362. He reviewed the history of the tax on aviation fuel. In 1994, the tax on jet fuel was raised from 2.5 cents to 3.2 cents with the previous increase occurring in 1968. The tax was raised to replace revenues that were being collected in conjunction with landing fees at rural airports. The total jet fuel tax revenue to the state is $17.1 million which is almost 20 percent of the states tax on motor fuel. Of this $17.1 million about $4.2 million is affected by HB 362. COMMISSIONER CONDON said Alaska is only allowed to tax planes flying to and from domestic locations. He said there are two policy questions, the first being the current taxation method and the second is whether or not in-state businesses have an economic disadvantage due to taxation. Number 2161 COMMISSIONER CONDON discussed the differences between imported and domestic fuel in the handouts, one based on dollars per barrel and the other on dollars per gallon, "Comparative Costs to Get Jet Fuel to Anchorage versus Market Prices in Anchorage." The handouts list various costs to Mapco versus the jet fuel importer. Mapco starts with the pump station price, adds TransAlaskan Pipeline tariff, the quality bank fee, refinery costs, train freight and the fuel tax for the per barrel Anchorage cost of $20.16 per barrel. For the importer, it starts off with a Caribbean spot market price, adds refinery costs and tanker costs for an Anchorage cost of $21.67 barrel. He said this was a best guess estimate and that some of the figures might be soft. He questioned whether in-state fuel distributors were or were not competitive with imported fuel distributors. He said if in-state fuel distributors were not competitive, the FTZ issues should be addressed and after addressing that issue, then HB 362 should be enacted. Number 2475 CHAIRMAN GARY DAVIS asked if the reference to the tanker costs figure which was based on a Kuwait tanker specifically related to the fact that it was Kuwait fuel that was sold last year. COMMISSIONER CONDON refuted this saying it was simply the best estimated price that they were able to determine. Number 2499 REPRESENTATIVE BRICE questioned the location of where this jet fuel would originate from in regards to differences in safety and environmental standards as compared to those standards of the domestic fuel. TAPE 96-1, SIDE B COMMISSIONER CONDON said the DOR would consider differences in those standards in determining whether the state needs to assist in-state producers in maintaining their economic competitiveness. Number 150 REPRESENTATIVE BRICE said the question is one of equity not of competitive ability and in that light he suggested that we look at pieces of legislation, such as HB 362, in a more favorable manner. Number 216 COMMISSIONER CONDON said his only concern is determining whether or not in-state producers can out compete foreign producers. Number 278 REPRESENTATIVE JERRY SANDERS pointed out to the figures in the handout and commented that in regards to Fairbanks it would be more expensive for the importer and less expensive for the in-state producer. He asked for a break down of fuel tax revenue from Fairbanks as compared to Anchorage. He also asked if any of this imported fuel sold last year was sold in Fairbanks. Number 316 COMMISSIONER CONDON said he was unable to answer those questions. CHAIRMAN GARY DAVIS said it appeared no foreign fuel was sold last year in Fairbanks. Number 355 BOB BARTHOLOMEW, Deputy Director, Income and Excise Audit Division, Department of Revenue, said he could produce figures on the amount of fuel tax collected in Fairbanks as compared with Anchorage. REPRESENTATIVE SANDERS asked if Fairbanks was under the same threat, as Anchorage, due to the FTZ. MR. BARTHOLOMEW said if Fairbanks wanted to enact a FTZ they could do so, but currently all aviation fuel, in-state and foreign, was taxed. Number 392 REPRESENTATIVE JAMES disagreed with the numbers listed in the handout in that it lists refinery costs as being equal. She also mentioned that costs to the importer can be reduced depending on the volume they are selling. Number 493 COMMISSIONER CONDON discussed the advantages the North Pole refinery has experienced. He briefly mentioned the tanker issue in his handout by stating that a larger tanker could not be used to save costs because of the lack of storage in the Cook Inlet. Number 574 CHAIRMAN GARY DAVIS mentioned the difficulties faced by in-state refineries and commented that any efforts to reduce the marketability of their product could have a drastic impact. Number 596 REPRESENTATIVE THERRIAULT questioned the handouts refinery pricing as being the same in both locations. He also questioned using the figures of spot marketing which assumes that a quantity of fuel is being sold at one time for one price as compared to on going contractual selling of fuel. He added that large tankers could be utilized if there would be two selling points such as Hawaii and Anchorage. He concluded that in this type of market, pennies can be the deciding factor and he would not want to lose business in the state. Number 692 STEPHEN LEWIS, Chairman of the Board, Petro Star/Arctic Slope, stated his and other refineries interest in HB 362. He listed his 18 years of experience in the refinery industry with a primary background in accounting issues. He said he would disagree with most of the figures proposed by Commissioner Condon. He stated differences between the smaller refineries such as Petro Star with Mapco. The North Pole refinery was built in 1977 with a 28,000 barrel per day (BPD) unit and has paid for itself. He said Mapco has continued to expand to 130,000 BPD. He said that Petro Star was built in 1985 and in 1993 running 12,000 BPD and 40,000 BPD respectively and are still in the process of paying for themselves. MR. LEWIS said the handout listed Mapco contractual price and stated that no other in-state refinery enjoys such a price from the pump station. He backed up this statement with the following numbers, including the fact that PetroStars' crude oil is based off of a West Coast market price and Tesoro's is a market basket price backed up to a pump station price. MR. LEWIS discussed the quality bank fee which used to be based on specific gravity and is now based on distillation methodology. The perceived great advantage of the quality bank disappeared a few years ago with potential of decreasing even further. In addition PetroStar only retains a quarter to a third of the barrel so for every dollar paid, only that much of the barrel is recovered. Mapco is probably in the 35 to 37 percent retainment range per barrel. Number 1002 MR. LEWIS said the refineries PetroStar is competing against are full conversion refineries. In full conversion refineries, the whole barrel is ground up to get 100 to 100 percent plus product out of a barrel of crude using cat crackers and reformers. PetroStar and Mapco only retain a portion of the barrel which means they have higher conversion costs. Number 1057 MR. LEWIS disagreed with the handouts tanker costs predictions. He reiterated Representative Therriault's point about penny differentials and added that some times a business will go to the fourth place in penny savings. He said the tankers last year were not the first foreign fuel to be introduced and will not be the last. In PetroStars estimate there is a ten tanker capacity in Anchorage which displaces $60 million in in-state refineries revenue. Mr. Lewis cited various competitors in the aviation fuel market, but said Kuwait Oil announced that they would not pursue the Alaskan market. He then added the future prospects are worse and mentioned the major air carriers are planning on bringing in fuel from outside sources and have plans to assist the smaller airlines with obtaining this fuel. He said that in-state refineries should have the same advantages as the importers of foreign fuel have. Number 1334 CHAIRMAN GARY DAVIS remarked to Mr. Lewis that the option to tax foreign fuel is not a state possibility. He asked if there were any plans for increasing or utilizing storage in Anchorage or in other places in south central Alaska. Number 1378 MR. LEWIS said there is a large project occurring at the Anchorage International Airport adding tankage within the premises. The military is also finalizing the contract to bring Chevron tankage back on line. Mapco is also looking at building tankage. He summed up that storage is increasing in Anchorage especially by the consortium of the airline carriers at the airport. Number 1424 REPRESENTATIVE SANDERS asked if the foreign fuel is significantly lower priced than fuel produced in-state. Number 1470 MR. LEWIS said outside refineries conversion costs are much cheaper as well as lower tanker costs. The crude price in Alaska is much cheaper. He mentioned the handouts use of spot price and said no one of any size buys spot price. REPRESENTATIVE SANDERS asked if the outside refineries had such advantages whether they would always be able to out compete the in state refineries. NUMBER 1545 MR. LEWIS said the in-state refineries have gotten much more competitive but the 3.2 cent fuel tax disadvantage will be hard to overcome. Number 1784 JEFF COOK, Vice President, Mapco Alaska Petroleum, was next to testify. He said Mapco has refineries in North Pole which refines 40,000 BPD with one half of production in jet fuel. Mapco has locations in Anchorage, Fairbanks, Wasilla, Eagle River and Juneau for whole sale marketing. They are also expanding into Kenai and Soldotna this year. Mapco spent $320 million for crude oil purchases from the state, salaries, supplies, and transportation. Mapco employs over 375 people and are the largest customer for the Alaska Railroad and Golden Valley Electric. MR. COOK said 65 percent of the jet fuel is sold on the international market through the airport. Of that 65 percent, half goes to flights leaving for foreign destination and the other half going to domestic flights. MR. COOK read from the DOR fiscal note, "Alaska will lose tax revenue from the FTZ independently of HB 362...actual revenue lost is dependent on the amount of foreign fuel that will be imported and placed in the FTZ and Alaska is preempted from taxing this fuel." Mr. Lewis said the fiscal note used the amounts the two tankers brought in last year and said air carriers who have now experienced the cost savings of the FTZ will continue to utilize them in their fuel purchases. He read from the FedEx and Northwest Airlines letters that both stated this point. Number 2049 MR. COOK said Mapco stands to lose up to 63 million gallons in sales just in the return portion of those foreign fuels. More revenues could be lost if customers decide it is better to buy all their jet fuel from a consolidated source and the railroad as well as in-state refineries would be negatively impacted. MR. COOK mentioned the oil glut in the world. He referred to the handout and said it does not accurately reflect operation costs in Alaska. He said Mapco is willing to look at other options besides HB 362 if it can reduce the economic disadvantage faced by in-state refineries. Number 2368 CHAIRMAN GARY DAVIS asked a question regarding the handout and the fuel tax figure listed, he questioned and received confirmation that this figure was just the state tax. JAMES BURNS, Petro Marine Services, was next to testify. TAPE 96-2, SIDE A Number 000 MR. BURNS said most jet fuel is sold based on indexes such as the West Coast or Singapore index. This fuel is not sold under transportation cost and added that the fuel can be brought into Alaska on a much cheaper rate than was listed by Commissioner Condon. Number 174 KIM DANIELS-ROSS, Director, Alaska Air Carriers Association said she is speaking on behalf of 140 domestic air carriers when she said HB 362, which provides a tax exemption for a few select air carriers, could be unfair and encourage misuse and manipulation. She suggested that this might occur within the FTZ and within the DOT/PF with their accounting and funding mechanisms. She said three times the DOT/PF came to the domestic carriers with budget shortfalls and have sought higher user fees, higher fuel taxes and other revenue enhancement. MS. DANIELS-ROSS said HB 362 might have a negative impact on Alaska's local domestic air industry which supports life in the rural area. HB 362 would create the loss of $4.5 million in tax revenue which is being used to fund the rural airport maintenance and operation budget. This loss of revenue would need to be supplied from other sources such as airport lease rates and landing fees. One domestic company estimates their portion of the shortfall due to HB 362 would be $300,000 to $400,000 per year and would be passed on to the consumers. She questioned the lack of state challenge to the FTZ rule book. She also urged the attachment of fiscal plan which would not subject the domestic air carriers to bear the burden of the shortfall. Number 553 REPRESENTATIVE THERRIAULT said he believed it was a misstatement when she declared the state was giving away tax revenue. He added the DOR projected loss of $700,000 due to foreign fuel sales. He said he would be interested in challenging the FTZ, but said it involves more than just questioning it in order for it to go away. REPRESENTATIVE NORMAN ROKEBERG joined the table for the committee discussion. Number 672 MS. DANIELS-ROSS said the ruling by the local customs officer has not been challenged and that work in that area should be addressed. Number 710 REPRESENTATIVE JAMES asked if the domestic carriers were using jet fuel so that she could ascertain if they were subject to taxation. Number 740 MS. DANIELS-ROSS said the domestic carriers use mostly jet fuel. REPRESENTATIVE ROKEBERG said he is from the district encompassing the Anchorage International Airport and worked on the FTZ issue. Number 851 PAM LaBOLLE, President, Alaska State Chamber of Commerce, read her sponsor statement titled, Testimony on HB 362, into the record. She encouraged the support of HB 362, (which she misstated as HB 154.) She reiterated the FTZ economic disadvantage to in-state businesses. She supported legislation which would reduce the economic advantage to foreign fuel importers and support Alaskan businesses. Number 1043 M. CLYDE STOLTZFUS, Special Assistant, Office of the Commissioner, Department of Transportation and Public Facilities, was next to testify. The Administration is currently working with Anchorage to find the cost benefits of the FTZ and the management of that zone. He said the original intent of the FTZ was a joint management between the state of Alaska and the municipality of Anchorage. Number 1120 REPRESENTATIVE THERRIAULT asked if the ruling of the FTZ has been challenged. Number 1160 MR. STOLTZFUS said that a challenge is one of the alternatives the state is looking into. CHAIRMAN GARY DAVIS asked if the discussions between Anchorage and the state have been favorable. MR. STOLTZFUS said the discussions have been cordial. Number 1175 REPRESENTATIVE THERRIAULT questioned the expediency of this issue in regards to the need for the Administration and the Legislature to work together and mentioned that it might be a year before the issue can be addressed again. Number 1185 MR. STOLTZFUS said the most important thing that he is taking from this meeting is that time is of the essence. CHAIRMAN GARY DAVIS announced that HB 362 would be carried over until Wednesday, January 31, 1996.
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